Bitcoin welcomes Federal Reserve alert: How will the market react?

Bitcoin investors focus on interest rate decision as expectations of Fed interest rate hike heat up

With the release of U.S. inflation data, market expectations for the Fed's possible interest rate hike next week are rapidly rising. Cryptocurrency analyst Sherlock pointed out that in just seven days, the probability of the Federal Reserve raising interest rates soared from 58.4% to 86.4%, a change that attracted close attention from Bitcoin investors.

Historical data shows a strong first day, followed by selling pressure

Sherlock conducted a retrospective analysis of past Fed interest rate decisions. He pointed out that Bitcoin tends to remain relatively strong on the first day of interest rate hikes, but is prone to selling pressure in the following weeks. Historical data shows that of the 20 interest rate hikes, 17 cases showed Bitcoin falling to a lower level after 30 days.

The first-day rise cannot conceal the medium-term downside risks

According to Sherlock's analysis covering 20 Fed interest rate hikes since 2015, Bitcoin does not always fall sharply on the day the decision is announced. Of the 20 interest rate hikes analyzed, 11 ended with Bitcoin closing higher on the day. However, most of these initial positive trends were not sustainable. Of the 11 cases where increases occurred after interest rate hikes, in 10 cases prices fell below the level on the day of the decision one month later. Therefore, analysts stressed that possible gains in the short term after interest rate hikes do not necessarily represent a sustainable rebound signal.

The most eye-catching data in the analysis was the performance 30 days after the rate increase. In 17 of the 20 interest rate hikes, Bitcoin traded below previous levels 30 days after the decision was announced. In addition, 19 out of 20 cases showed that BTC fell below the price on the day of the decision within one month of the rate increase. During this period, Bitcoin's median decline was 9.3%. Although past performance does not guarantee a repeat in the future, the data does suggest that selling pressure on Bitcoin may increase after interest rate hikes.

The US$70,000 mark may become key support

Sherlock calculated that if Bitcoin was at approximately US$78,000 before the resolution and repeated the historical median decline of 9.3%, then BTC could pull back to a level of approximately US$70,700. In times of more severe monetary tightening, losses tend to be greater. For example, after the interest rate hike cycle that began in December 2015, Bitcoin depreciated by 19% in 30 days; while in the interest rate hike cycle that began in March 2022, although Bitcoin showed some resilience at the beginning, it still experienced a decline of as much as 46.3% in 90 days.

For Bitcoin, the risk may not be limited to next week's interest rate decision. Sherlock pointed out that futures market pricing appears to reflect investors 'concerns about longer-term monetary tightening. Data shows that the market's expectation that interest rates will be at least 50 basis points higher than current levels before the end of the year is 72.6%. This strengthening of expectations could lead to longer periods of pressure on risky assets. Although Bitcoin may move sideways or rise briefly on the day of decision, major price movements may emerge in subsequent weeks.

Comprehensive assessment

If the Federal Reserve raises interest rates next week, Bitcoin's first wave of reaction may not be a direct sharp decline. Historical data shows that BTC is indeed likely to rise on the day the decision is announced. However, 17 of the past 20 interest rate hikes have left Bitcoin at a lower position after 30 days, highlighting the risk of medium-term selling pressure. If the historical median decline repeats, the $78,000 Bitcoin price could drop into the $70,700 range. It should be noted that past performance does not guarantee future price movements, and the Fed's statement and expectations for future interest rate hikes will also have a decisive impact on the direction of Bitcoin.